A zero-sum game

JapanÆs Ministry of Posts and Telecommunications is like an oil tanker: humungous, and unable to quickly change direction. But once it sets on a course, it is unstoppable. All the smaller boats in its way had better move or get crushed.

Therefore it was with dismay that foreign asset managers û mere fishing boats û realized the oil tanker is headed their way. The MPT set a course to dominate JapanÆs defined contribution pension business.

The MPT has a longstanding role of offering financial products, particularly insurance and bank deposits. Many rural areas lack bank branches but every village has a post office. Yucho, the postal savings system, and Kampo, the postal life office, together have amassed Ñ368 trillion ($3.4 trillion) as of March 1999, making the MPT one of the biggest institutional investors in the world.

For the past several years, as foreign fund managers rapidly gained market share in Japan, the MPT was seen as a prize. Indeed, Yucho and Kampo have become anchor mandates for some foreign asset managers. But in late 1999 MPT announced its intention to compete with asset managers in offering products for defined contribution, setting off a wave of dismay. Indeed, it prompted the American Chamber of Commerce in Japan (ACCJ) to make a rare public protest. Surely private asset managers, whether Japanese or foreign, could not be expected to compete against MPT? Surely this was not an appropriate function for MPT?

One asset manager in Tokyo put it this way: ôWould you trust the guy who sells you stamps with your retirement account?ö Passively selling bank deposits is one thing. Actively pushing global equities funds is another. Few Japanese own stocks or have even heard of an investment trust (local lingo for mutual funds). The training and educational effort required not just for consumers but for the guy selling stamps will be tremendous. Professional asset managers are worried that a bungled job by MPT could spoil the publicÆs appetite for defined contribution products.

But mostly theyÆre worried that theyÆll be shouldered out of a business that is set to be difficult even without MPT. Fund managers say when defined contribution arrives û the Diet could pass the legislation as early as the end of this year, and asset managers expect to begin marketing DC products by mid-2001 û it will take at least five to seven years before anyone breaks even. The most popular products will probably by guaranteed income funds or time deposits, and DC is probably going to take off only slowly.

Investment trusts have high fees: a 100 basis point management fee and a 100 basis point distribution fee is common, and asset managers have gotten rich as churn-happy brokers push their product. DC funds will be cheap, perhaps with only 50% of the fees of normal investment trusts, and arenÆt expected to be churned.

Now with MPT muscling its way into the game, asset managers expect it will easily take a third of JapanÆs DC market.

What MPT lacks, however, is expertise at managing investment funds. Therefore, it is prepared, at least for the early years of DC, to let third-party investment managers handle this on its behalf. When foreign fund managers realized that ACCJ and other organizationsÆ protests fell on deaf ears, they quickly changed tack. If you canÆt beat Æem, join Æem. This spring, foreign fund managers have exercised damage control, hoping to jump on the bandwagon.

Fund managers say, however, that MPT will probably only mandate one or two from their ranks, as well as hand out several mandates to Japanese asset management firms. ôItÆs a zero-sum game,ö says one fund manager in Tokyo.

This mandate is crucial: access to a dominant piece of Japanese defined contribution. In Japan, pension mandates have come in waves. One such wave broke in 1998, when return-hungry pensions dumped traditional trust banks and mandated foreign asset managers in droves. Mandates donÆt turn over frequently in Japan û this first wave wonÆt create ongoing opportunities for players entering the game now. The MPT mandate is not only going to make winners into DC giants, but unlike corporate pensions, it will be closed to only one or two foreign names.

Foreign fund managers are lobbying MPT, either on their own or through groups such as ACCJ and the European Business Council, to include as broad a range of service providers as possible. But they acknowledge that given the education effort required among post office workers and the public at large, it is in MPTÆs interest to keep the menu simple. For asset managers, whether they win the MPT business or launch DC funds on their own, the single most important factor will be to stabilize their own costs.

ôYou have to have a Plan B,ö says a foreign fund manager. Those who miss out can try to push for future mandates from MPT. Those who rely on building only a DC business may find they need to go after existing defined benefit business. Tears will be shed.

There are other concerns beyond the mandate, and that is MPTÆs conduct in the DC arena. How open and transparent will the process of selecting investment managers be? After ACCJÆs initial opposition to MPTÆs entering the DC market, it started working to ensure its members would not be discriminated against by vengeful bureaucrats. It beseeched MPT to keep the mandate process transparent, and MPT appointed an advisory panel of seven academics, headed by Tsugio Tajiri, professor of economics at Tokyo International University, to vet investment managers and provide a recommendation to MPT.

This panel had three questions: what role should MPT play in defined contribution? What type of products should it offer? What criteria and process should it use in choosing products from private financial institutions?

The next step was for the panel to send a questionnaire to ten relevant organizations and get their feedback. Recipients included ACCJ, the European Business Council, Standard & PoorÆs, Morningstar, the Japan Investment Trust Association, the Trust Association of Japan, the Life Insurance Association, the Japanese Bankers Association, the Casualty Insurance Association and the Japanese Securities Dealers Association.

Tellingly, the questionnaire omitted questions regarding MPTÆs role in DC. Clearly that was no longer a topic of discussion.

And worryingly, when these organizations attended the panelÆs hearings, the panel consisted of none of its academic members. Instead, the panel was represented by Yucho and Kampo bureaucrats. ôMPT already knows what it wants; the panel is just a rubber stamp,ö says one cynical asset manager. MPT has promised, however, to publish the results of all the questionnaires. This will show how much of outsidersÆ recommendations were incorporated in MPTÆs final decision, which is one indication of MPTÆs willingness to act in a transparent manner.

This is important, because as long as MPT provides a reasonable menu of products, foreigners canÆt criticize it for being anticompetitive. All it needs now is to avoid being tarred as opaque and secretive. MPT, after all, should have a fiduciary responsibility to the Japanese public. At least this is what asset managers argue.

What some foreigners would like to see, whatever the mandate results from MPT, is to create a more open process going forward. For example, couldnÆt MPT establish a selection and monitoring committee with a third-party rating agency or consultancy, rather than absentee academics?

And canÆt MPT and asset managers work in a more cooperative environment going forward? Asset managers would surely welcome a two-way business relationship, where they could sell MPT products, as well as the other way around.

For now, however, the asset management community will have to adjust itself to make room for the bureaucrats. As defined contribution becomes a reality in Japan next year, the government will start off as the market share leader, leaving professional fund managers scrambling for whatÆs left. As one fund manager noted, ôThe market is theirs to lose.ö